Market And Nonmarket Funding Mechanisms

Many funding proposals suggest the use of voluntary contributions to provide the financial resources for a REDD fund. Such funding sources identified in the second UNFCCC workshop (UNFCCC, 2007) include:

• overseas development assistance;

• voluntary contributions from NGOs and governments;

• private sector sponsorships and donations;

• new and additional sources under the UNFCCC;

• funds created under the UNFCCC and the Kyoto Protocol (for example the Special Climate Change Fund, the Adaptation Fund) and the Trust fund of the Global Environment Facility;

• taxes on carbon-intensive commodities and services.

The advantages of non-market funds are that they:

• do not devalue the price of existing tradable carbon;

• do not divert financial resources from the control of major sources of GHG emissions;

• do not threaten to reopen the difficult and drawn out discussions of the Marrakesh Accords;

• reduce the need for Annex I parties to use offsets against their emissions targets;

• provide for an early start on REDD given that REDD will not operate under the Kyoto Protocol in the first commitment period 2008-12 (UNFCCC, 2007).

The basis of market approaches is the generation of credits from REDD in developing countries that can be used by countries with capped emissions for meeting their commitments. The broader the scheme in its coverage of sources and sinks of carbon, such as forests, the lower the costs of compliance. An increase in demand for credits would be generated by deeper reduction commitments by countries post-2012.

The following advantages of market-based instruments were advanced at the second workshop (UNFCCC, 2007: 15).

• Provide incentives for the engagement of the private sector in project-based regional and national approaches and augment the volume of non-market funds which has been inadequate.

• Units of trade must all equal one tonne of emissions reduced or avoided and market systems require robust carbon accounting systems which increase the credibility and value of ensuing credits.

Several commentators suggest that market-based mechanisms that allow Annex I countries to offset their emissions against REDD have the potential to provide the necessary continuity and volume of funds (see for example Karousakis and Corfee-Morlot, 2007 and Skutsch et al., 2007).

A question that needs to be resolved is the desirability for a limitation on the number of credits that could be generated by REDD, similar to the limitation on CERs generated by the CDM in the first commitment period. The work of Jung (2005) was reviewed in Chapter 3 and this tended to confirm fears that the inclusion of REDD in the first commitment period would have diluted the market and lowered the price of carbon credits, thus relieving the need for Annex I countries to make reductions in emissions in their energy sectors. One way of limiting the need for a cap on REDD credits would be for the overall emission target of Annex I countries to be negotiated, while at the same time taking account of the level of REDD credits that could be forthcoming (Skutsch et al., 2007).

The proposals of Mollicone et al. (2007) and Santilli et al. (2005) assume that credits would only be sold after they had been verified as having been achieved, as with certified emission reductions of afforestation and deforestation under the CDM. (This is in contrast to forestry offsets in the voluntary market that are invariably sold ex ante, that is before they have yielded verified sequestered carbon: see Chapter 3.) For the initiation of projects, financing would be needed against future carbon credits. As Schlamadinger et al. (2005) note, there is no reason why national governments could not sell options to REDD credits before a program is in place. Such up-front financing would facilitate the initiation of projects by developing countries themselves. The governments or companies could then elect to buy the actual credits when the program is completed. To reduce the risk of selling options that do not materialize, only a proportion of the credits expected could be pre-sold, or insurance could be taken out against program failure.

Such pre-financing could be done through the World Bank, as in the case of CDM projects or by the host country selling carbon credit options, the revenue being directed at REDD programs. Once the program yields credits, the investors could then decide to buy the credits.

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